Trade as a Wage Disciplining Device

Abstract

This paper considers the wage-setting behaviour of a monopoly union facing foreign competition. Contrary to intuition, trade integration is predicted to make union wages less sensitive to foreign wage changes if union preferences are sufficiently biased towards wages relative to employment. This is confirmed empirically using sector-level time-series on EU member states, using the existence of a statutory minimum wage as a proxy for union strength and wage-bias. The fact that there exist configurations in which wages become less correlated between countries after trade liberalisation does not imply that wages diverge internationally. The results do indicate, however, that some empirical results on the effects of economic integration on labour markets may need to be reinterpreted.